Assume that you are the treasurer of XYZ Bank Plc, and the bank is expecting to receive US$100 million from a client for a loan repayment in six months to be invested for a six-month period. The ALCO is concerned that rates will fall, in which case the investment return will be lower. Therefore, the ALCO has asked you as a derivatives specialist to prepare a report on how the bank can use a forward rate agreement (FRA) to hedge against interest rate risk.Required:A. Briefly explain how the FRA would work in this instance. Further, mention whether the bank would need to buy or sell the FRA.B. Currently, the contract rate for such an FRA is 5 percent per annum and assume a 360-day year. Further, assume that six months from today the settlement rate is 3 percent per annum. Calculate the settlement value of the FRA contract.
Assume that you are the treasurer of XYZ Bank Plc, and the bank is expecting to receive US$100 million from a client for a loan repayment in six months to be invested for a six-month period. The ALCO is concerned that rates will fall, in which case the investment return will be lower. Therefore, the ALCO has asked you as a derivatives specialist to prepare a report on how the bank can use a forward rate agreement (FRA) to hedge against interest rate risk.
Required:
A. Briefly explain how the FRA would work in this instance. Further, mention whether the bank would need to buy or sell the FRA.
B. Currently, the contract rate for such an FRA is 5 percent per annum and assume a 360-day year. Further, assume that six months from today the settlement rate is 3 percent per annum. Calculate the settlement value of the FRA contract.
AI-generated content may present inaccurate or offensive content that does not represent bartleby’s views.
Unlock instant AI solutions
Tap the button
to generate a solution
